Annual Meetings Turning Ugly, But Change Remains Elusive

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Annual shareholder meetings—which traditionally have been mostly pep rallies—are not showing the love this year.

At Citigroup's (NYSE: c) shareholder meeting this week, speaker after speaker vented rage at how the banking giant has been operating.

Bank of America's (NYSE: bac) CEO Ken Lewis and the bank's board are under fire from shareholders over the acquisition of Merrill Lynch and losses that led the bank to take taxpayer bailout funds. There is even speculation that shareholders may try to remove Lewis and the board at next week's meeting.

And General Electric, (NYSE: ge) parent company of CNBC, has had its annual meeting in Orlando, Florida picketed by dozens of company retirees over dividend cuts.

So what's bringing out the knives in 2009's annual meetings? While there are plenty of issues to complain about, analysts point to the anger over executive compensation as corporate enemy number one.

"It's the symptom and the cause of what’s wrong," says Nell Minnow, founder of Corporate Library, an independent research firm for corporate governance. "There are other issues like accounting and risk management, but compensation is a driving force."

In some cases, shareholders have won concessions. Just today, Pfizer (NYSE: pfe) shareholders approved a version of "say on pay" at their annual meeting, though the measure is non-binding.

Still, annual meetings remain more about venting than substantive change.

"Shareholder meetings are not an effective way to do business," says Anne-Marie Fink, book author and vice president at JP Morgan Asset & Wealth. "The forums are too large and have different aims. And institutional investors, which average 70 percent of public companies, rarely attend."

Of the proposals pending before companies, executive compensation remains the top issue as of April 15th, according to RiskMetrics Group, a financial risk management firm:

Advisory vote on compensation 107 (number)

Require majority vote for directors 86

Report on political spending 60

Right to call special meeting 46

Take action on climate change 36

"The majority of proposals by shareholders last year and this year are on executive compensation," says Colin Diamond, a partner in the capital markets group of White and Case, a global law firm. "I think another year of executive compensation is likely to be top item on agenda."

One example of the compensation movement can be seen through SEIU Master Trust, the manger for pension funds of the Service Employees International Union.

SEIU Master Trust sent letters to boards of directors of 29 firms in its portfolio, including Goldman Sachs (NYSE: gs) , American Express (NYSE: axp) and Morgan Stanley,(NYSE: ms) demanding they investigate more than $5 billion in compensation to those firms' executives. The SEIU Master Trust also demanded that the companies overhaul their compensation practices to prevent incentive pay regardless of corporate performance. They also plan to propose the changes in proxy votes.

Experts say the annual meeting season this year will continue to be an ugly one.

"There are going to be a lot of angry shareholders turning out," says Joseph Crivelli, a senior vice president and investor relations professional at Gregory/FCA. "The CEOs I work with are spending a lot more time focusing on their presentations and they are prepping to make sure they have good answers for questions."

"It’s the business climate and the growing recognition that we as a society have been enablers for this bad behavior," says Minnow. "It's important to let the CEOs know we are paying attention to them and people are letting them know."

"People want piece of mind," says Michel Breit, head of the Public Company Group at Eisner LLP, an accounting firm. "Boards and CEOs are very concerned cause they are going to get questions and they don't want to be embarrassed."

And some analysts say they've already seen a change.

"Boards are changing their compensation packages," says Pat McGurn, special counsel at RiskMetrics Group. "Companies don't want to have what happened at Citi's meeting with all those angry investors."

But whether shareholders can make a permanent difference beyond their anger, still remains an issue for some analysts.

"The entire shareholder activisim movement has come about because boards are not viewed as helping shareholders," says Professor Espen Eckbo of the Tuck School of Business at Dartmouth College. "Boards are really working for management rather than shareholders. Until that changes, not much will get done."

And at least one expert says the whole issue over shareholder anger could go away with a better economy.

"It's all about how shareholders are doing," says Steve Barth, a partner at Foley and Lardner a law frim specializing in corporate services.

"If share prices are up, shareholders are happy,' says Barth. "Executive compensation would not be an issue if the economy was doing better."

Barth also says it's up to companies to determine which proposals by shareholders are really valuable. "You get the same people year after year making a hundred proposals," says Barth. "Those are not always the accurate feelings of the shareholders."

And executive compensation is not really new, according to Breit. "We had the issue 10-15 year ago," says Breit. "What's making it more relevant today, is TARP. Companies taking government money are under more pressure."

But as shareholders battle for control over executive compensation, seek open votes for board members and demand more corporate transparency, experts say CEOs are on notice, at least for now.

"I think we will see a couple of CEOs lose their jobs," says Corporate Library's Minnow. "The anger is there and we'll have to see how it plays out, but I expect the anger to have an effect for now and the future."